The ending merchandise inventory for the current year is overstated by $20,000.What effect will this error have on the following year's Net Income?

Question

Quizplus · Accepted Answer

The ending merchandise inventory for the current year is a part of the cost of goods sold (COGS) calculation. If the ending merchandise inventory is overstated, it means that the COGS has been understated by the same amount. This will result in an increase in Net Income for the current year. However, in the following year, when the overstatement in the ending merchandise inventory is corrected, the COGS will increase by $20,000, resulting in a decrease in Net Income by the same amount. Therefore, the net income of the following year will be understated by $20,000.

The Ending Merchandise Inventory for the Current Year Is Overstated